An emerging change in employment law called “joint employer status” could be a game-changer for the Canadian franchise industry, lawyers say.

Unions and other employee advocates are arguing that the relationship between franchisees and franchisors is so close that both should be considered “joint employers” of a franchisees’ employees.

“We have already seen an increased risk of joint employer status in the United States and the shifting legal landscape on joint employer issues in Canada appears to be headed in the same direction,” says Andraya Frith of Osler, Hoskin & Harcourt LLP in Toronto.

Franchises are based on brand uniformity and consistency of customer experience. The joint employer question arises because franchisors impose certain controls on franchisees, including rules on employees and employment.

“If joint employment arrives anywhere in this country, it will be a game-changer,” says David Shaw of Blake, Cassels & Graydon LLP in Toronto.

Larry Weinberg of Cassels, Brock & Blackwell LLP goes so far as to call the threat an “existential” one.

“The unions are pushing very hard to say franchisors should be joint employers, on the theory that franchising itself is some kind of sham created just to defeat unionization,” he says. “But it’s not and if these changes come, people aren’t going to be franchising anymore.”

If these changes come, people aren’t going to be franchising anymore.

The economic implications are significant. After the U.S., Canada has the second-largest franchise industry in the world, with an estimated 1,300 franchise brands and more than 78,000 franchise units. These employ more than one million Canadians or seven per cent of the work force. Franchising is particularly significant in Ontario, which boasts 56 per cent of the country’s franchise headquarters and 65 per cent of its outlets.

Some 20 per cent of Canadian consumer dollars for goods and services are spent at franchise outlets. Franchise brands are pervasive, found in a wide variety of industries including food, hotel, car rental, travel, real estate, pharmaceuticals, optical, education, day care and in-home care. The hospitality sector is the largest, comprising almost 40 per cent of franchised brand names. In recent years, home-based and mobile franchises have enjoyed the most growth. All the Canadian banks have established national franchise departments.

The prospect of joint employment in the industry is most acute in Ontario, where the government is considering changes to the Employment Standards Act and Labour Relations Act. Proposed amendments to these laws include a recommendation to deem a franchisor the joint employer of its franchisees’ employees for certain purposes.

Franchisors are also concerned about Ontario’s Healthy Menu Choices Act, which comes into force on Jan. 1, 2017. The legislation requires premises with 20 or more locations in Ontario that sell prepared, ready-to-eat food to post itemized caloric and other nutritional content on menus.

The Canadian Franchise Association successfully advocated for lawmakers to change the proposed law so franchisors won’t, as originally contemplated, be liable for breaches of the law by their franchisees. Yet franchisors will still have to be careful that they do not fit within the category of someone “who has responsibility for and control over the activities.” The Act is specific in providing that such a person “may” include a franchisor.

Jennifer Dolman, also with Osler, says the control issue is key to whether a joint employment relationship exists. “If franchisors start exercising too much control over the nitty-gritty of employment practices, particularly hiring and firing, they could be creating a risk that they’ll be characterized as joint employers.”

The issue gained prominence in the industry about 18 months ago, when the National Labor Relations Board in the U.S. suggested, in a case involving McDonald’s USA LLC, that the test for joint employment be altered.

Historically, the test required the actual exercise of control over employees or conditions of employment. Under the new test, franchisors could be liable as joint employers of their franchisees’ staff if the franchise agreement was drafted to include or imply control over employment, regardless of whether the franchisor in fact exercised such control. The NLRB reiterated its position in August 2015 in a case involving Browning-Ferris Industries.

These U.S. decisions may not be binding in Canada, but they are causing quite a stir in Canadian franchising circles.

“The idea behind franchising is to grow with partners who are independent contractors and invest their own capital,” says Stéphane Teasdale of Dentons Canada LLP in Montreal. “Making the franchisor a joint employer annuls that concept because it means the franchisor becomes invested in the business of the individual franchisee.”

Aggravating the problem is the absence of a bright line in the law as to the degree of control required to trigger a finding of joint employment.

“Franchisors have to be careful not to cross over the line, but the line is not definable,” says Susan Friedman of DLA Piper Canada LLP in Toronto.

For their part, franchise lawyers are taking a cautious, preventative approach.

“We’ve been advising some of our clients to scale back on some of the areas in their operations manuals and practices that touch on employment issues,” says Helen Fotinos of McCarthy Tétrault LLP in Toronto.

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